A timely reminder for directors: when insolvency rears its head…

In a relatively recent wrongful trading claim brought by liquidators, the directors in question were not ordered to make any contribution to the company, as the company was found to have suffered no loss. This was a lucky escape for the directors on the facts. (Re Ralls Builders Ltd (in liquidation) [2016] EWHC 243 (Ch)). Other directors have not been, and may not in the future be, so lucky.

We therefore consider it timely that we remind directors of the steps that they should take when facing trading difficulties. Once a company becomes insolvent, a director’s primary duty must turn to the creditors, rather than the company and its shareholders. If a director fails to acknowledge the insolvent situation or fails to take steps to protect creditors, and the position of creditors worsens, the director may incur personal liability for the additional losses suffered.

Directors should therefore ensure that they take the following steps:

  1. Maintain accurate and up-to-date company financial records.
  2. Continue to monitor and review the financial state of the company. Document, diarise and stick to specific and regular dates to ensure such reviews are undertaken.
  3. Consider the potential impact on creditors of all the decisions you take with regard to the management of the company's affairs.
  4. Hold frequent board meetings convened specifically for the purpose of reviewing the company's financial position and keep proper minutes of those meetings, noting in particular any decisions made and the reasons for them.
  5. Continually monitor future cash flows and consider ways to reduce expenditure.
  6. At an early stage, you should take legal advice from lawyers and/or an insolvency practitioner and ensure that any advice received is documented.
  7. You should then continue to take professional advice as necessary, aimed at reviewing whether insolvent liquidation is inevitable or whether there is some way of resolving or reducing the company's financial difficulties.
  8. You should consider the capacity in which any professional advice is being received. It would be prudent to take separate personal advice as a director, where professional advice is being provided only to the company.
  9. View resignation as a last resort, but if it becomes unavoidable, you should minute any dissent with other directors at a full board meeting and set the reasons out again in a resignation letter to the whole board.

In each insolvency situation, there are always specific and intricate issues that must be considered, on a case by case basis. To ensure that the risk of any personal liability is minimised, you are advised to obtain professional advice at the earliest opportunity.  We have a number of reputed insolvency lawyers at Turner Parkinson who would be happy to have an initial no cost and no obligation meeting with you. Please click for details of the lawyers in our team.